The Budget

The Budget has ignited debates about tax and spending. But both the Budget and the public debate ignore two enormous elephants: Pensions and Housing Benefit.

Pensions

Osborne will take some comfort from the fact that this year's borrowing requirements for the current financial year have been predicted down from the £170bn predicted by Alastair Darling in March to £143bn as predicted by the OBR. We heard that the government will begin to pay down the national debt in 2014-15.

But there is a ticking time-bomb that is simply being ignored. The State Pension already costs £63bn, and will balloon further as the number of pensioners rockets. The IEA estimate that, including pension liabilities, the national debt is over 270% of GDP - the kind of figure quoted by people like John Redwood when they claim that every man, woman and child owes something in the region of £60,000. Osborne paid lip-service to pensions, but there was little in the way of action. Moreover, his rhetoric focused only on public sector pensions and ignored the wider issue of the state pension - perhaps focusing ire at a particular group is politically easier than dealing with benefits that affect everybody?

That wouldn't be a problem if we took our current pensions arrangement at face-value. After all, current national insurance contributions are supposed to pay for current pension payments. But this ignores the nature of the state pension. We've heard plenty about how public sector pensions are unsustainable, and about how final-sector salary schemes are unsustainable. But the state pension is a scheme whereby current expenditure pays for current pensions - in other words, it is run on the basis of final-salary schemes rather than on the basis of investment schemes. The state pension in its current format is utterly unsustainable, and will mandate vast future tax increases on those of working age to pay for the failure of pensioners to get to grips with pension funding. Yet all three political parties have shown a remarkable lack of political will in failing to get to grips with it. The Budget would have been the perfect time to get all our difficult spending decisions out in the open, instead we have more procrastination and yet another spending review, yet more time wasted on recommending the bloody obvious.

Housing Benefit

Much of the public and politicians, particularly Daily Mail readers, focus on ballooning benefit bills and on "scroungers" claiming unemployment benefit. The truth is that unemployment benefit is relatively trivial, costing less than £3bn. On the other hand, Housing Benefit is over ten times bigger costing over £30bn. And as Osborne noted in the budget, HB has risen an incredible 50% above inflation over the last ten years, though he omits to mention that it's rise has been inexorable ever since the Thatcher years.

Again, Osborne paid lip-serve to the costs of HB, but only tinkered with the margins by setting an upper-limit and discussing the small minority of expensive cases. This is completely ignoring the real problem: a dire lack of affordable housing, and a Benefit system that doesn't reward tenants for negotiating the lowest possible rents. When the state is prepared to pick up the bill for housing costs at the bottom end of the spectrum fairly indiscriminantly, at the same time as making new development difficult through planning laws, then it is unsurprising that there has been massive rent inflation. This is set to continue.

The solution is very simple: build more houses. Over the medium-long term period, and given that construction costs are currently low, it is possible to recoup land and construction costs through (albeit subsidised) rents. Capital investment in housing and a real system to reward local authorities who build council houses (we were promised this in the election campaign - where is it????) are the only ways to keep Housing Benefit down, whilst simultaneously improving the quality of life for the millions currently in overcrowded housing. Indeed, the small number of outrageous HB bills that do exist only exist in the first place when local authorities cannot find any suitable housing for unusual residents. A better housing stock would simply solve this problem overnight.



So there you have it. Not an awful budget, and a good mix of different proposals. But it is not the "tough" or "brave" budget that many pretend: it fails to get to grips with the really significant long-term drivers of public spending, and instead settles for tinkering on the margins of tax. This is a temporary budget, not a budget for the future.